Elevation Plans Sophomore Fund To Be Smaller

Firm: Elevation Partners

Fund: Elevation Partners II LP

Target: $1 billion to $1.9 billion

Placement Agent: Not selected

Elevation Partners, the buyout shop firm that counts Bono as a co-founder, is expected to begin formally raising a second fund soon, five sources told sister Web site peHub. With offices in New York and San Francisco, Elevation is currently “unofficially” marketing to LPs, placement sources said.

Officials for Elevation declined comment.

Elevation is expected to seek a smaller pool than its debut fund. Fund II will likely look to raise from $1 billion to $1.9 billion, one of the sources said.

In June, Elevation co-founder Roger McNamee gave a speech at the Paley Center for Media in which he said, “I’m going into seed investing now as part of Elevation.” But he offered no details about how the firm would make the investments and did not respond to peHub’s request for comment. In July, a source told peHub that Elevation would raise a seed fund.

A person close to the situation said Fund II won’t be a venture capital seed fund. Instead, it will be a mid-market growth equity fund that will have the latitude to invest from seed to late stage, the source said.

Elevation raised $1.9 billion with its first fund in 2004, of which 92 percent has been invested, sources said. The debut fund has a net IRR of 8.52 percent, according to a March 31 report from the Washington State Investment Board, a limited partner. But one placement source said the fund actually has a net IRR of 12.2 percent.

“[Elevation I] literally just went positive at 4Q 2010 after being underwater due to a number of bad investments,” the placement source said. “LPs are not happy.”

However, one LP maintained that Elevation has done a “good job navigating through” various problems. “Fund I turned out not to be the best return, but it’s respectable,” the LP said.

Elevation has yet to hire a placement agent for Fund II, one source said. Marketing for the fund is expected to benefit from the addition of Avie Tevanian, a former senior Apple Inc. executive. The Mac OS X architect joined Elevation in January as a managing director.

The biggest investment Elevation made from its debut fund was in smart phone maker Palm Inc. The firm invested a combined $460 million in Palm from 2007 to 2009 through private investments in public equity transactions, starting with a $325 million PIPE in October 2007, peHub has reported. Hewlett Packard bought Palm for $1.2 billion in July 2010.

“Palm was a slight gain,” the LP said.

Elevation also has made a sizable bet on social networking site Facebook. It has invested $270 million in Facebook via three investments with a “blended valuation of $16 billion,” a source said. The firm is looking at a 5x return on its Facebook investment, the source said.

The firm also invested $100 million in user-review site Yelp, which has hired Goldman Sachs and Citigroup to lead an IPO that could value the company between $1 billion and $2 billion, according to a report in the Wall Street Journal. The Yelp investment could yield a 3x return for Elevation, the source said.

While Elevation may post nice returns on Yelp and Facebook, “is that really value-add private equity investing that PE firms promise their LPs when they fundraise? ” said a buyout executive who asked not to be named. “Or is it pseudo public equity investing?”

Elevation has seen some turnover since it launched. Marc Bodnick, a co-founder, left in January to join crowd-sourced question-and answer site Quora, while Kevin Albert, a partner and global head of business development, jumped to fund-of-funds manager Pantheon in September 2010. Rajiv Dutta, an Elevation managing director, died last January after battling cancer.

(Luisa Beltran is a senior writer for peHub.)